Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

The Headline Animator

Tuesday, April 28, 2015


Financial Review


DOW + 72 = 18,110
SPX + 5 = 2114
NAS – 4 = 5055
10 YR YLD + .05 = 1.97%
OIL – .06 = 56.93
GOLD + 10.10 =  1212.80
SILV + .21 = 16.71

House prices picked up in February, rising 0.5%, according to the S&P/Case-Shiller 20-city composite index. After seasonal adjustments, home prices rose 0.9% in February, matching January’s gain. Compared with February 2014, prices for the 20-city index were up 5%, the fastest growth in half a year. Home prices in Phoenix gained 0.3% for the month and 2.9% for the 12 month period.

The Commerce Department reports home ownership slipped to a 25 year low of 63.8% in the first quarter. The home ownership rate peaked at 69.4% in 2004. Household formation increased by 1.5 million in the first quarter. More people, starting more households, but they aren’t buying homes. With many Americans still showing an aversion to homeownership, the gains in household formation largely are being driven by renters.

Consumer confidence declined in April to a four-month low as Americans’ views of the labor market and the outlook on the economy deteriorated. The Conference Board’s index dropped to 95.2 from a revised 101.4 reading in March. The report showed fewer respondents said jobs were plentiful in April and income expectations cooled, signaling consumers will remain guarded about spending. The setback in sentiment may indicate demand will be slow to pick up after a stronger dollar, bad winter weather in some regions and a labor dispute at West Coast ports weighed on the economy in the first quarter.  Also, gasoline prices are edging up a little bit, so that’s a little bit of a negative.

Sometimes the general public is quite good at picking up on macro-trends, even short-term changes. As we started the year, crude oil was dropping like a rock and the dollar was blasting through the roof. Both oil and the dollar have turned around recently. Over the past 1½ months, the Dollar Index has been down 3 percent, and oil has gone up more than 30 percent. The question is whether the recent change represents a pause in the secular trend or reversal of the macro-trend.

The euro has finished higher against the dollar during five of the last six weeks. The trend for the dollar is heavily influenced by the Federal Reserve, as well as other central banks. While several global economies have adopted accommodative monetary policy, the Fed is hinting at raising rates. We’ll find out more tomorrow when the Fed concludes its 2 day FOMC meeting; and while no one expects the Fed to hike rates tomorrow, we’ll parse language for dovish or hawkish hints. The Fed will also offer their own economic forecast. And if the Fed holds their cards close to their chest, the secular trend is still for a fairly strong dollar because other central bankers are committed to an easy money policy.

Greek PM Alexis Tsipras said he would have to resort to a popular referendum if lenders insisted on “unacceptable” demands, but was confident about striking a deal to avoid such a scenario. Meanwhile, China’s central bank is planning to launch a new credit-easing program in the next couple of months. The Wall Street Journal reports the People’s Bank of China will allow Chinese banks to swap local-government bailout bonds for loans to boost liquidity and lending. In some ways the dollar is still the cleanest shirt in the dirty clothes hamper.

Meanwhile, the increase in oil prices has been more than a little bounce. In the past month and a half, oil has moved from $45 to $58, or about a 30% move; nothing to sneeze at. And we are heading into a seasonally strong time for oil, the summer driving season. Also, if the dollar shows any sign of weakness, it would lead to higher oil prices.

And then there is the geopolitical situation to consider when we look at oil. Any little mishap raises the Fear Premium for oil. We had a reminder today, when Iran seized a cargo ship near the Strait of Hormuz. The ship was initially reported to be American but later it turned out to be flagged to the Marshall Islands. Iranian news agencies said the seizure was strictly a civilian matter. It likely will be a non-event, but it is a reminder that tensions are high around the Persian Gulf.

We don’t know if oil is going higher or lower. And the dollar could run or stumble; we don’t know. The macro-trends of energy prices and direction of the currency directly impact stock and bond investments. We’ve seen that already in earnings reports; with analysts’ estimates ratcheted lower to reflect a stronger dollar, and depending on the sector, the positive or negative impact of lower oil prices.

Case in point today, BP, the British oil company posted a sharp drop in first-quarter profit; we’re still waiting for most of the Big Oil companies to report;  but BP’s results beat analyst estimates due to a larger than expected increase in refining revenue. In an interesting twist, BP reported underlying replacement cost profit – which takes into account the fluctuations in the price of oil – came in at $2.6 billion, down from $3.2 billion a year earlier. They have oil but they have to guess at its value. Production for the period was 8.3% higher than the first quarter of 2014.

In other earnings news today: United Parcel Service beat first-quarter profit expectations, although sales came up short. Earnings for the latest quarter rose to $1.03 billion from $911 million in the year-earlier period.  Currency changes reduced total sales growth by 2.2 percentage points, even as total shipments increased 2.8% to 1.1 billion packages

Merck reported earnings of $953 million, or 33 cents a share, down from $1.71 billion, or 57 cents a share, a year earlier. The pharmaceutical giant raised its earnings guidance for the year, despite the negative impact of the stronger dollar.

Pfizer posted a profit of $2.4 billion, up from $2.3 billion. Pfizer trimmed its full-year outlook citing a stronger U.S. dollar and weaker euro.

Ford Motor reported first-quarter net income fell 7 percent to $924 million from $989 million a year earlier. Ford is still working to increase production in North America to accommodate their redesigned F-150 truck, meanwhile they posted a loss on South American operations.

According to data from Thomson Reuters, first-quarter earnings are now on track to post a slight gain after the mostly stronger-than-expected results, defying forecasts for the first profit decline since 2009.
Yesterday after the close, Apple reported $13.6 billion in net income for the first quarter on revenue of $58 billion; Apple easily beat estimates on both the top and bottom line. Apple also raised its dividend 11% and said it would increase its capital return program from $130 billion to $200 billion. Apple closed down today by about 2%. Sometimes earnings reports don’t make much sense for the trader.

Twitter released their earnings today in tweets, the problem was that they tweeted out earnings news at 3:07PM eastern time, and they weren’t supposed to report until after the market closed at 4:00Pm. Twitter stock fell, trading was halted, then reopened, and then Twitter stock really fell big, about 18%. You would think Twitter would know to be careful what they tweet.

One trend that will emerge from earnings season is even more stock buybacks. Goldman Sachs forecast an 18 percent jump in buybacks and 7 percent climb in dividends for the year. Next week more than 80 percent of the Standard & Poor’s 500 market cap companies will have exited the “blackout period” in which share repurchases are put on hold prior to quarterly results announcements. Companies that make those cash infusions see an automatic increase in their per-share earnings and dividend yield. That tends to raise their share prices, which could bolster the broader market. Of course there are limits to buyback programs, and the bigger consideration is that if a company is buying back their own shares they are using cash that might be used to grow the business, instead of shrinking the shares outstanding.

And then consider the trend of ever increasing margin debt. The NYSE reports margin debt rose to an all-time high in March at $476.4 billion, up from $464.9 billion at the end of February. And the wrinkle is that margin debt rose during the month of March even as the S&P 500 dipped nearly 2 percent. Margin debt is created when investors borrow money in order to buy stocks. If an investor buys $100 worth of stocks with $50 in capital, that individual has $50 of margin debt outstanding. Since margin debt provides leverage, it amplifies gains, but also increases the risk to an investor.

Brazilian oil company Petrobras’ $17 billion write-down, announced last week, may have been meant to close the accounting on a sprawling corruption scandal, but could instead provide fresh ammunition for a U.S. class action lawsuit. The case, filed in Manhattan federal court in December by a group of large investors, alleges $98 billion of the company’s American depository shares, or ADRs, and bonds were artificially inflated since 2010 by the company overstating the value of assets such as major projects. Petrobras has moved to have the case dismissed.

And another trend that just won’t go away – “Banks Behaving Badly.” The Securities and Exchange Commission is investigating whether Bank of America broke rules designed to safeguard client accounts, potentially putting retail-brokerage funds at risk in order to generate more profits. For at least three years, the bank used large, complex trades and loans to save tens of millions of dollars a year in funding costs and to free up billions of dollars in cash and securities for trading that Bank of America otherwise would have needed to keep off-limits. Now, the SEC is investigating whether the bank’s unusual strategy violated customer-protection rules and whether the bank misled regulators about what it was doing. This is not some theoretical threat to consumers. The collapse of Lehman Brothers in 2008 and of MF Global. in 2011 left some brokerage customers waiting for the return of billions of dollars of their own money, leading regulators to strengthen the long-standing customer-protection rule.

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